Sebi bars JM Financial from taking new mandates amid lapses in debt issue

“In respect of the existing mandates, JM can act as a lead manager for the public issue of debt securities for two months,” said Sebi’s whole-time member Ashwani Bhatia in the interim order. The merchant banker has been given the liberty to file its reply/ objections in the matter within 21 days.

According to the order, in 2023, the market regulator undertook a routine examination of Non-Convertible Debentures (NCD) public issues.

During the inspection, Sebi found that a considerable proportion of individual investors in a certain issue sold the securities assigned to them on the day of the listing. The securities’ holding pattern revealed that, on the day of the listing, a sizeable portion of the securities issued changed hands, leading to a substantial decline in retail ownership. This in itself was ‘unusual,’ according to Sebi.

Sebi said that the observations in the order were based on the material available on record and that the investigation into this matter will be completed in six months.

In that particular issue, A.K. Capital Services Ltd., JM Financial Limited, JMFL-MB (Noticee), Nuvama Wealth Management Limited, and Trust Investment Advisors Private Limited were the lead managers.

Upon closer inspection of the transactions on the day the said issue was listed, it was discovered that JM Financial Products Ltd (JMFPL-NBFC), a non-banking finance company and a subsidiary JM Financial Ltd Merchant Banker (JMFL-MB) had both supplied the funds used by these investors to subscribe to the issue and served as a counterparty to their trades. Afterwards, JMFPL-NBFC sold a sizeable amount of the securities it had bought from these individuals to corporate investors that same day, offloading them at a loss.

The regulator’s investigation also revealed that these investors had submitted their applications in the public issue through the stock broker JM Financial Services Ltd (JMFSL-Broker), another subsidiary of the noticee– JMFL-MB. JM Financial Ltd, the lead manager; JM Financial Services Ltd, the stockbroker; and JM Financial Products Ltdd, the NBFC, are part of the JM Financial Group.

The order stated that JM, in its reply to the regulator’s observations, stated that such practices were part of the ordinary course of business.

“It was also stated that a similar approach has been adopted in many of the other issues where it was the lead manager. Such practices as explained earlier have detrimental effect on the orderly functioning of the market and harm the interest of the ordinary investors. They also distort the functioning of the price discovery mechanism in the securities market. Given the same, there is an urgent need for the regulator to step in and pass interim directions, pending investigation, to prevent any further erosion in market integrity by virtue of such practices”, Bhatia said in a 22-page order.

The regulator’s order comes close on the heels of Reserve Bank of India’s directions barring one of its other group entities, JM Financial Products, from providing loans against shares and debentures, including sanction and disbursal of loans against initial public offering (IPO) of shares, with immediate effect. The RBI issued the order on 5 March.

The banking regulator RBI said the action had been taken after observing certain serious deficiencies in the financial services firm’s loan process. More importantly, the central bank highlighted serious concerns about the company’s governance issues, in addition to violating regulatory guidelines.

Reacting to the RBI move, J M Financial reiterated that it has done a “careful and detailed review” and that there was “no material deficiencies” in its loan-sanctioning process.

Sebi issued the order after market hours on Thursday. JM Financial shares closed at ₹87.94 apiece, up 3.12%.

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Published: 07 Mar 2024, 05:42 PM IST